This paper offers an emerging market perspective on the determinants of bond
yield spread changes. The study covers the period 2005-2013 and it is based on
a sample of 106 corporate vanilla bonds listed on the South African market. To
capture the impact of the financial crisis of 2007-2008, the sample period is split
into three sub periods, the pre-financial crisis (2005-2006), mid-financial crisis
(2007-2009) and post financial crisis (2010-2013). The study shows that changes
in equity volatility, interest rate level and the yield curve slope are significant
determinants of bond yield spreads. The impact of equity volatility and interest
rate level is more pronounced during the mid-financial crisis period. Controlling
for credit ratings and bond convexity does not alter the findings. The study
confirms the results documented in developed countries, and highlights the key
determinants of bond values and returns of active bond trading strategies. For
policy makers, the findings of this study call for further measures and reforms
to address liquidity challenges on the bond market and volatility induced by
non-resident investors.

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Keywords

Equity volatility, Bond yield spread changes, Corporate bonds, South Africa, Emerging markets